“Deep-Sea Eel Pizza with Robert Hsu”

Time escapes the Gumshoe today, so we’re going to have a look at a quick email I got from Robert Hsu late last week.

Hsu’s ads for his China Strategy service tell us that the key to his success is understanding Chinese consumers and what they want, and understanding how China is different. He believes he has that understanding because of his “boots on the ground” research crew, his own heritage and language skills, and his frequent visits to the Middle Kingdom.

I can buy that, I suppose — though I think the importance of “boots on the ground” has a tendency to be overstated by some newsletter editors and analysts who enjoy travel junkets … and there’s always the risk for analysts who visit companies in person that they can get infected with management enthusiasm. But in the case of China or other places where corruption is rampant and accounting is not necessarily always reliable, I can see how the personal visits and experience can be a benefit. And I know many of my readers really like China Strategy and subscribe, though I don’t know if he has as many fans now as he did when China stocks were almost universally on fire (he did advise caution to his subscribers last Fall, from what I hear, though I don’t know the specifics).

But the point is … Hsu has a stock he was touting in a recent email, a tip he’d love to pass along to you if only you would pretty please with sugar on top subscribe to China Strategy.

It’s a brief tease.

He says that whether a company “gets it right” when modifying their products or their marketing for the Chinese consumer is a huge difference-maker for separating those companies with effective Chinese business from those who are just “investing in China” and hoping to take advantage of the sea of potential consumers without adjusting their products.

This is an argument you’ve probably heard many times before. Successful businesses adapt to their customers, not usually the other way around.

In Hsu’s words:

“… the poster child for doing China right is a fast-food outlet that sells Western-style…noodles!

“Wisely, the company teamed up with local entrepreneurs, sought out local franchises, and adapted to local tastes.

“Every trip through China with my China Strategy subscribers ends with a nice dinner at this restaurant chain. In China, where this is considered a top ‘date restaurant,’ a waitress takes our order and the very brightness of the lighting signifies abundant wealth. By this time in our journey together, my subscribers had adjusted to Eastern ways. We settled on a Deep Sea Eel pizza, large with all the toppings. Just like the natives.

“In today’s issue of China Strategy I show you why you should invest in this wonderful Western-style noodle shop in China. The stock is as American as apple pie, and the profits you make will be as big as Texas—all in a New York minute. And you, I promise, will feel like a smart cookie for getting China right. Join China Strategy now for all the details on how to invest in this company.”

So … the “noodle shop” bit might throw you off a bit, but this is …

Yum Brands (YUM)

Which owns Pizza Hut, Kentucky Fried Chicken, and Taco Bell. And yes, Pizza Hut is an upscale restaurant in China, and it has met with some success, probably in part because it does indeed offer variations for Chinese tastes — like Deep Sea Eel as a pizza topping. And yes, they do sell some noodle/pasta dishes, too, just like they do here.

In fact, Yum Brands is now pushing forward with expanding Taco Bell into Mexico, too … so it goes both ways, the popularity of Taco Bell in Mexico will probably not be because they make it “more Mexican”, there are more than enough taco chains South of the border already … the Taco Bell success in Mexico, if it comes, will be because it’s an American brand with a standardized product.

No word yet on whether they’re trying to expand into Italy with Pizza Hut.

Hsu gives the example also of McDonald’s, which has not done so well in China because there’s no particular affection or tradition for the hamburger there — but McDonald’s does make local adjustments, too, just apparently not successful ones in this instance (ever have a beer at a McDonald’s in Europe? A lobster roll at a McDonald’s in Maine? I don’t know how they adjust their Chinese menu, but apparently it’s not enough, and maybe they don’t “upscale” the experience like Pizza Hut does).

Kentucky Fried Chicken, by the way, is also very popular in China — partly because chicken was already popular in the country, and partly because they adjusted their menu and design pretty dramatically, too.

Hsu has been recommending Yum Brands for a long time, and claims profits in the range of 60% so far in recent emails, if I remember correctly.

YUM trades at a bit of a premium to its fellow big fast food chains, largely because they have been so successful in China and are often touted as a way to invest in China without taking on the risk of buying Chinese companies. It’s a very big company, and is profitable and growing … if you’ve never looked at it before it may be worth a gander, but this one is not likely new to many of you. The Motley Fool also touted it as part of one of their ads last year, if you’d like to see the Gumshoe writeup on that one.

There are other stories about retailers and restaurants that are trying to and/or have successfully gotten into the China market — I looked at one last year that a newsletter was touting as the Starbucks of China (though Starbucks is itself growing fast in China, too, and trying to solve the riddle of the Chines consumer). That one turned out to stink with both nostrils.

Most of the “Next … in China” stories are probably hooey (just like most “next Google” or “next Starbucks” stories everywhere), but YUM has a track record and a decade or so of good growth there to build on. This may or may not be a good investment, but it is a real one, with a good market position and a valuation that’s at only a little bit of a premium to the market average. They had 30%+ growth in earnings last quarter, announced a few weeks ago, and they’ve boosted their outlook for the year. We could all do worse.

Share your thoughts...

YUM is a 5 for 5. Broke a triangle pattern with the triple top at $38. I’d like to buy on a pullback – say $38. Lehman ranks it as neutral and says “China represents ~25% of YUM profits and is growing 20%/yr.Yum! Restaurants International shows a large list of worldwide franchise opportunities available.

I eat at Pizza Hut in China a few times a month. I believe their real profit comes from KFC. I know a couple years ago they opened 700 new KFC’s in one year! True PH is a bit more upscale than in the US and it is more of a sitdown restaurant here. As for the noodles, sure they sell spaggetti and such but pizza is the big ticket. As for Taco Bell, I would not expect much for some reason Chinese people dont much like mexican food. I love it but it sells poorly here. Brazillian BBQ does… Read more »

And anyone wanting to visit, thestockadvisors.com website will find 2 more newsletter writers outing this stock. Hsu has gotten cautious with mainland China stocks in both China Strategy and AsiaPacific Edge. The latter newsletter currently really is following the “invest because of China..but not in China” philosophy. Along those lines and not wanting to sound mercenary, methinks foreign infra-structure companies (from mining to construction) with China ties will soon become very hot

I’m actually in Suzhou now and there are KFCs everywhere. In fact, compared to other parts of China I’ve been, I haven’t seen many North American fast food chains here other than KFC. They really need to bring the egg tarts to North America!
McDonald’s is probably less popular because Chinese tend to favor chicken and pork over beef. Plus they use hamburger buns and put ketchup on their breakfast sandwiches.. Eww.

McDonald’s has never been one of my favorite restaurants. I can say that in Ji’nan (about six and a half million people) that at least one McDonald’s doesn’t sell any beef sandwiches at all. There are a sundry and assorted chicken sandwiches and varied and assorted fish sandwiches.
Hsu seems to be taken with Shanghai first and Beijing second. I often wonder if he and his staff travel outside those two cities.

Pizza Hut/KFC is seen as a premium eat-out to the average Chinese, who will save up so that they can bring their family there for the “meal-of-the-month”. And the fact is there are just that many many families in that many many tier2/3 cities…

(In fact, I was at the pre-opening celebration of the China plant of my company, and they ordered KFC lunch for all the staff)

What about the Mexican cement giant Cemex (cx) listed in the United States. Conflicting info on their website. Says they serve all of Asia, but their Thai operation says it is focused domestically. On the other hand money (yuan) talks? Cemex only other Asian operation appears to be in the Phillipines. ALMOST close enough for dry bulk shipping.

YUM??? The Oxford Club has them since 09/04 @ $20.14, so unless they’ve had a “stealth” split since, it’s about doubled in 4yrs. God, 100’s of Chinese stocks have done that in a year or less, what’s the big deal with YUM? I have it on good info that coffee houses are becoming the “In Place” in many Chinese cities, but my boots haven’t hit China soil yet, so help me out guys, he-he! Maybe gumshoe knows about an over-hyped Chinese coffee stock: GWDC.OB This BOMB is trading at it’s all-time lows of .16, but those Green Chip wahoos are… Read more »

Angang steel listed is in the US ANGGF.PK
Angang is also in discussions to sell a 2% stake in the company to Arcelor-Mittal (MT). (Mittal wants 25%) Not knowing the production capacity of Angang and China’s other larger #1 Steel producer…it might be worth watching Mittal stock.

Hi SageNot — yep, GWDC is indeed the China coffeehouse I wrote about last year, the link is in the article above. I’d much rather buy Starbucks, but haven’t really researched coffeehouses in China at all. YUM is definitely not a Chinese company, of course — I’d think of it as a big US multinational that happens to have gotten its China business on track earlier and better than most US consumer brands. China is still much smaller than the US as far as their sales go, and YUM actually has a much smaller overseas footprint than McDonalds — they… Read more »

I received a newsletter from “BreakAway Investor” with a teaser called the Putin Protection Plan. They say it could return 493% in 12 months. Are you familiar with this newsletter and teaser. It sounds interesting and probably has some political truth to it, but like most things it seems to good to be true. Your comments!

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